VLCC Spot Market Posts Lowest First Half Earnings in Two Decades
According to Gibson, “undoubtedly, the exceptional weakness in the VLCC market is almost entirely due to fundamentals. According to Kpler, during the 1st half of the year total Middle East crude exports, which account for the lion share of all VLCC trade, averaged 15.25 million b/d, down by a colossal 2.1 million b/d compared to 1H 2020 and even more if compared to 1H 2019. Meanwhile, 37 VLCCs have been delivered since July last year, while just 6 units have been scrapped (although there have been a few more reported demolition sales of floating storage units). There has also been a notable decline in VLCC floating storage. The 2nd quarter of last year saw a surge in storage requirements due to contango and oversupply of crude, with non-Iranian VLCC storage peaking in June 2020, when 77 VLCCs were used for crude and product floating storage. The picture is very different now, with our latest estimates showing just 25 vessels in non-Iranian storage, mainly fuel oil”.
The shipbroker added that “apart from very weak fundamentals, there is also another factor at play, which could explain why VLCC earnings on nonscrubber, non-ECO basis have underperformed relative to other tanker sizes. The VLCC fleet has the highest uptake of exhaust gas cleaning technology. Nearly 39% of the existing fleet have scrubbers installed, while another 5% are still planning to retrofit. The technology is also expected to be installed on around 34% of the orderbook. The penetration of scrubbers is considerably smaller on other size groups. Suezmaxes are in second place, with scrubbers installed on 26% of the fleet and another 4% planning to retrofit. Scrubber uptakeon other sizes is even smaller”.
Gibson added that “scrubber equipped vessels have been able to generate increasingly higher returns due to rising oil/bunker prices, with VLCCs benefitting the most due to long haul nature of their trade. The spread between HSFO and VLSFO increased from an average of $50-70/tonne range in June 2020 to an average of $110 – 120/tonne in June 2021. For scrubber equipped VLCC tonnage this means that the earnings premium on TD3C nearly doubled from $4,000/day to $7,000/day over the period, even though absolute freight/TCE levels were much higher in 1H 2020 compared to 1H 2021”.
“With 39% of existing VLCCs having scrubbers on board, the simple maths would suggest that the majority of the trading fleet is still generating much lower returns. In reality, however, the picture is more complex. As reported earlier by Gibsons, about 10% of the existing non scrubber VLCC fleet are employed solely in sanctioned trades and are not competing in the international market. In addition, a number of ageing non-scrubber ships involved in storage should also not be considered as trading vessels. Finally, some of the modern non scrubber vessels are much more fuel efficient, generating higher returns compared to an average 10 year old non-scrubber vessel. To conclude, the above clearly demonstrates why VLCC earnings for non scrubber,non eco vessels have been so unsustainably depressed this year. Simply put, there are plenty of tankers around that can achieve higher returns”, the shipbroker concluded.
Nikos Roussanoglou, Hellenic Shipping News Worldwide